Despite the fact stocks as a whole experienced a rather ho hum year, if you were in the right places, there was some serious money to be made. Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), for starters, more than doubled their share price over the past 52 weeks. Unfortunately, some of that trading activity is starting to look reminiscent of the Internet bubble some 15 years ago. While these well capitalized growth names continue to attract investor attention, a large chunk of speculation seems well baked into their prices.
On the other side of the spectrum, investors have also had no qualms punishing companies that haven’t lived up to expectations. As is typical, those companies are becoming even more punished this time of the year due to tax loss selling, and this is where we find our 12 contrarian investment ideas for 2016.
Though it generally takes a lot of patience and perhaps gumption to step in and buy stocks that have ended up in the trash bin, those situations can prove to be some of the most lucrative over the long run. Investors are certainly apt to chase the church of what’s happening now, but they’re seemingly less likely to step under what appear to be falling knives.
The trick, however, is to not find yourself stuck in a value trap. Just when you think you’ve found a diamond in the rough, things can sometimes get worse before they get better. Sometimes they never get better. Here are some “trash bin” investment ideas to hone in on as we move into a new year.
Fertilizer/Agricultural Stocks: Companies that provide products that increase agricultural yields have been pummeled this year. Industry mainstays, Potash Corporation of Saskatchewan (POT) and Mosaic (MOS) have large upsides if the pricing/demand dynamics of fertilizer turn around. They are both down in the neighborhood of 50 percent. Another idea would be Agrium (AGU), which has held up much better due to a more diverse business model, but probably has less upside if and when fertilizer fundamentals turn around.
Retail: Weaker than expected holiday shopping and a seemingly nervous consumer have put pressure on many retailers, although latest data shows a pickup in December. My sense is investors have overshot the downside in some of the higher quality names. I think Nordstrom (JWN), for one, has been overly punished. Even cheaper is Macy’s (M), although I think JWN is the better play for long-term investors. On the specialty apparel end, Abercrombie & Fitch (ANF), one retailer that many thought was on its way out, has made a nice comeback and could be a continued recovery story in 2016. One of its competitors, one-time darling Aeropostale (ARO), is priced for bankruptcy.
Out Of Favor REITs: While there are real concerns about the effect that rising rates may have on highly levered real estate investment trusts, some of these names are trading substantially below net asset value, with covered double digit yields. Senior housing owner New Senior (SNR) is probably my favorite name there, currently yielding 10.5 percent. Commercial real estate lender Apollo (ARI) yields nearly as much. NorthStar Realty Finance (NRF), a diversified real estate owner, yields even more. If SNR and NRF are able to improve their balance sheets amidst stable business, these could be tremendous total return opportunities. Given the leverage however, it does not come without above average risk.
Energy: Though I’ve listed energy, I frankly don’t have much conviction in a the rapid rebound potential of the story. Midstream energy, once thought of as a safe haven in the storm, has been absolutely decimated this year, with kingpin Kinder Morgan Inc (NYSE:KMI) shares dropping by over 50% with an associated 75% cut in its dividend. Even the better capitalized integrated companies are struggling under the umbrella of sub $40 oil. However, nibbling now on new positions may not be the worst of moves, especially if you have a thesis that sees $50-$60 oil over the next year. Still, I don’t think I’d get slap happy with new money here.
Closed-End Funds Trading At Discounts: Interest rate fears have created double-digit discounts in many of these mostly fixed-income vehicles. With added leverage, investors are able to reap far higher yields than might be found in individual bonds. The risk here is that rates ramp quicker than expected, forcing NAV and likely share price lower. Still, if rates remain tame, as I expect they will, the risk that investors are pricing in is likely overblown. Some CEFs I have picked up here near the end of the year include: Blackrock Muni Intermediate Drtn Fnd Inc (NYSE:MUI), ERC, JPC, and NMZ.
The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.
Adam Aloisi was long AGU, JWN, NRF, SNR, ARI, KMI, MUI, ERC, JPC, and NMZ at time of writing, but positions can change at any time.